Reverse FOIA: Shifting the Burden Under Exemption 4

Kurt D. Ferstl, Reed Smith LLP

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Kurt D. Ferstl, Reed Smith LLP

Government contractors take elaborate internal measures to ensure protection of sensitive corporate business information, including overhead costs, indirect rates, technical and management information, such as providing this information with appropriate markings to the government when submitted as part of a proposal for a government contract. These same contractors are often surprised by the prospect that their confidential and sensitive business information may be disclosed by the government directly to competitors through the Freedom of Information Act ("FOIA"). 5 U.S.C. õ 552.

FOIA provides that "each agency, upon any request for records which (i) reasonably describes such records and (ii) is made in accordance with published rules...shall make the records promptly available." 5 U.S.C.õ 552(a)(3)(A). While the "basic policy behind FOIA is one of disclosure," FOIA contains nine statutory exemptions that prevent disclosure, including Exemption 4, which prevents disclosure of trade secrets and commercial or financial information. Action taken under one of the statutory exemptions, commonly referred to as a "Reverse-FOIA" action, is necessary to prevent disclosure.

One specific category of information sought by FOIA "requestors" is contract line item ("CLIN") pricing. The analysis for disclosure under Exemption 4 is centered on whether the "submitter" is likely to suffer a competitive harm from the disclosure of CLIN pricing. One could argue that disclosure of CLIN pricing may allow a competitor to "reverse engineer" its costs, resulting in a competitive advantage to the requestor.

Reverse-FOIA Under Exemption 4

There have been many cases interpreting Exemption 4 in the federal courts, with most courts turning to the U.S. Court of Appeals for the District of Columbia ("D.C. Circuit") for guidance. The two most cited cases, National Parks and Conservation Assoc. v. Morton, 498 F.2d 765 (D.C. Cir. 1974) ("National Parks") and Critical Mass Energy Project v. Nuclear Regulatory Comm'n, 975 F.2d 871 (D.C. Cir. 1992) ("Critical Mass") outline tests used to determine whether FOIA Exemption 4 applies to a particular category of information.

A body of Exemption 4 case law implementing the National Parks and Critical Mass tests has developed in the D.C. Circuit. These cases involve a difference of opinion between the United States District Court for the District of Columbia ("District Court"), and the D.C. Circuit as to whether certain CLIN pricing is exempt from disclosure. In the McDonnell Douglas cases, the District Court has consistently required disclosure of the requested information, while the D.C. Circuit has ruled that certain CLIN pricing is exempt under Exemption 4.

In McDonnell Douglas Corp. v. NASA, 981 F. Supp. 12 (D.D.C. 1997) ("McDonnell I"), the District Court held that the line-item pricing information was not protected from disclosure under FOIA Exemption 4 because the contractor "did not provide the required level of detail evidencing substantial competitive harm." Id. at 16. The District Court also explained that the release of the submitter's CLIN pricing information in that case would not rise to the level of "substantial competitive injury" because bidders for government contracts compete on a variety of different factors, price being just one of those factors, and because any subsequent competitive disadvantage arising from the disclosure "should be as the cost of doing business with the government." Id. at 16. The District Court further emphasized its position towards disclosure of certain pricing information in Martin Marietta v. Dalton, 974 F. Supp. 37 (D.D.C. 1997) where the District Court also found no competitive harm arising from disclosure, adding as further justification that:

The public, including competitors who lost the business to the winning bidder, is entitled to know just how and why a government agency decided to spend the public funds as it did; to be assured that the competition was fair; and, indeed, even to learn how to be more effective competitors in the future. Id. at 41.

In McDonnell Douglas Corp. v. NASA, 180 F.3d 303 (D.C. Cir. 1999) ("McDonnell II"), the D.C. Circuit characterized as "silly" the District Court's reasoning in McDonnell I that disclosure of the requested cost or pricing data would not cause competitive harm through underbidding by competitors because price was only one factor used by the government in awarding contracts. Id. at 306. The D.C. Circuit rejected NASA's argument that "underbidding due to disclosure would not occur because price is only one of many factors used by the government in awarding contracts," determined that the agency had "implicitly recognized that it would be to the competitor's advantage to receive...line item pricing information," and concluded that "it follows that appellant will be competitively harmed by that disclosure."

In McDonnell Douglas Corp. v. United States Dep't of the Air Force, 215 F. Supp. 2d 200 (D.D.C. 2002) ("McDonnell III"), the District Court again ruled in favor of disclosure on summary judgment, explaining that the Air Force's action deciding to release the requested CLIN pricing was not arbitrary or capricious. Id. at 209. The District Court took care to distinguish the justification provided by NASA in McDonnell I and II from that provided by the Air Force in McDonnell III. The District Court explained that the Air Force took the position that even if "underbidding" took place as a result of the disclosure of the CLIN pricing, the effects of such underbidding would be diluted because pricing is only one of many evaluation factors. Id. at 208. Accordingly, explained the District Court, "the likelihood of competitive harm would be greatly reduced." Id. at 208.

In both scenarios, the District Court appears to suggest that because pricing is just one of many factors used in awarding contracts, it does not matter if the disclosure of a contract awardee's CLIN pricing may cause "underbidding." The District Court seemed to suggest that McDonnell II would apply only if an agency explained that underbidding would not occur as a result of the CLIN pricing disclosure, as did NASA in McDonnell I and II, and not just that the effects of any "underbidding" that may have taken place would be "diluted" by non-price evaluation factors, as did the Air Force in McDonnell III.

Simply put, release of the option year prices in the present contract would likely cause McDonnell Douglas substantial competitive harm because it would significantly increase the probability McDonnell Douglas's competitors would underbid it in the event the Air Force rebids the contract." Id. at 1189. The D.C. Circuit concluded that the "disclosure of McDonnell Douglas's option year prices would likely cause McDonnell Douglas substantial competitive harm by informing the bids of its rivals in the event the contract is rebid. Consequently, the option year prices fall within the scope of Exemption 4, and the decision of the Air Force to release them was contrary to law. Id. at 1190.

Practical Considerations: What does this mean to you?

Neither McDonnell II nor McDonnell IV created per-se rules that CLIN pricing is protected from disclosure under FOIA Exemption 4. In fact, following McDonnell II, both the Department of Defense and Department of Justice issued a series of department-wide memoranda and internet-based "FOIA Posts" explaining that the D.C. Circuit's decisions did not create such a perse rule, but instead was based on a fact-specific analysis of the contractor's claim of likelihood of competitive harm. Furthermore, in McDonnell IV, the D.C. Circuit allowed some CLIN pricing ("over and above work") to be released because McDonnell had not met its burden to demonstrate that such release would grant its competitors an advantage which was then likely to cause competitive harm. Id. at 1191-92.

Following McDonnell III, agencies often categorically rejected an initial claim of protection from release under Exemption 4 by explaining that the contractor's claims of likelihood of competitive harm were entirely "conclusory." While it is inherently understood by contractors that gaining a competitor's CLIN pricing will provide the FOIA requestor a competitive advantage, it is often difficult for the submitter to show with any specificity that such a competitive harm will in fact result. What McDonnell II and McDonnell IV appear to have done, however, is to arguably shift the balance towards nondisclosure, once a submitter can demonstrate that the requestor will gain a competitive advantage from the disclosure of the pricing information.

Reprinted with permission from Reed Smith LLP, a limited liability partnership formed in the state of Delaware. ¸Reed Smith LLP 2005.